Government Raises Concerns Over Giving Cryptocurrency Formal Regulatory Backing

The Parliamentary Standing Committee on Finance has concluded its discussions on virtual digital assets (VDAs) and is preparing its report on the sector. The panel has been examining the regulatory approach towards cryptocurrencies and other VDAs. It has held discussions with government departments, regulators, and other stakeholders as part of its study.

The Union Ministry of Finance has raised concerns about introducing a separate regulatory framework for cryptocurrencies, saying such rules could create a false sense of security among investors.

What Concerns Has The Government Raised

The Economic Affairs Division of the finance ministry reportedly told the committee that crypto assets can enable transactions outside traditional, state-controlled financial systems. It also highlighted challenges in regulating activities carried out through decentralised and non-custodial arrangements, according to a report in the Hindustan Times.

The ministry reportedly pointed to developments in other countries, where activities have shifted towards decentralised platforms and arrangements that can fall outside the reach of regulations with rules for centralised crypto intermediaries becoming stricter.

It also told the panel that the global regulatory approach towards crypto assets is still evolving and has significant gaps. According to the report, the government plans to continue using existing legal and regulatory mechanisms to address risks related to financial integrity, consumer protection, taxation and financial stability.

The ministry also reportedly expressed concern that formal regulation could lead less experienced investors to believe that cryptocurrencies have a level of protection or official backing that may not exist.

What Alternatives Is The Government Backing

The finance ministry has reportedly favoured greater use of the Reserve Bank of India’s (RBI’s) central bank digital currency (CBDC), or e-Rupee, instead of creating a separate regulatory framework for cryptocurrencies. The e-Rupee is also being used for direct benefit transfers (DBTs) under government welfare schemes.

India currently taxes profits from VDS at 30 per cent, while specified transactions attract 1 per cent deduction of tax at source (TDS). VDA service providers operating in the country are also required to register with the Financial Intelligence Unit-India (FIU-IND) and follow applicable anti-money laundering requirements.